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Equity Analyst Danny Deadlock has 30 years of experience speculating on Canadian penny stocks and targets capital gain opportunities and diversification in metals and minerals exploration, energy, and technology.
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Just a brief note this weekend to update on the valuations we are seeing in junior gold exploration stocks. There was also a small takeover in the sector today and that helps with benchmarking.
When the price of gold fell below $1200 per ounce recently, the junior gold stocks hit record setting valuation lows. Of the 50 we track on the TSX and TSX Venture (with a minimum 1 million ounces measured and indicated), the values came close to $11 per gold ounce last week. They have since recovered from that low but currently sit near $12.40 per ounce (using our risked reserve approach that has proven accurate since March of 2011).
I have published this chart in the past but this month added the price of gold so you can clearly see the valuation destruction in relation to the commodity price. Two of the primary drivers behind that destruction are the high operating and capital expenditure costs.
July 12 Takeover of Esperanza – Approx. $29 per ounce
Low Capex & Low Operating Costs (even with lower grade)
Today it was announced that Alamos Gold (TSX: T.AGI; 13.92) is acquiring Esperanza (TSX: V.EPZ; 88 cents) for 85 cents per share.
Esperanza is a gold exploration and development company focused on advancing its principal property, the wholly-owned Esperanza gold project in Mexico.
The transaction values the deal at $69 million.
Shares Outstanding: 81 million x 85 cents per share offer = $69 million
Arriving at valuation:
Resource: Measured & Indicated (M&I) = 1.5 million ounces gold at 0.83 g/t and 16M ounces low grade silver (<7 g/t)
Operating costs $500 per oz.
Initial Capex $114M
Gold recovery 65% to 75%
Net cash approx. $25 million
$69 million Takeover Price less approx. $25 million in net cash as per last financials = $44 million value on 1.5M ounces = $29 per M&I gold ounces.
Esperanza provides Alamos with a low Capex (capital expenditure) project but it is also lower grade. In light of this, however, they still showed low operating costs.
Obviously these were two critical factors that Alamos took into consideration when looking for a takeover target and also when arriving at fair value per gold ounce.
The number is well above the $12 average we are seeing for other exploration companies, but it is also well below the $42 we saw in 2012 for two Ontario gold projects that had 5 to 6 million ounces and grades in the range of 1 gram per tonne.
It was surprising to see Alamos target Esperanza when EPZ announced only a month ago that the Mexican government would not approve their environmental permit application.
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Disclosure: Danny Deadlock does not own shares of Esperanza.
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